Palantir Technologies (PLTR 3.73%) was one of the top artificial intelligence (AI) stocks in 2023. With its long-term history in this space, it makes sense that Palantir received much attention since its tools were already miles ahead of some competitors.
Furthermore, Palantir entered 2023 at a dirt-cheap valuation, priming the stock for even more gains. With an incredible 160% performance in 2023, it seems like a tall order to repeat. So, does it have what it takes?
Palantir's tools give users the ability to apply AI to nearly any situation
Both government and commercial customers widely use Palantir's AI tools. However, the company's roots are found in the government side. Originally, its software was used to crunch mounds of data and help its users make well-informed decisions based on the platform's output. This was incredibly useful for intelligence agencies, military commanders, and other logistics-based situations.
Knowing that this software would also be practical in the commercial world, Palantir expanded and provided commercial clients access to the same software used by the government.
In 2023, Palantir introduced another add-on to its software: AIP (the artificial intelligence platform). This is the company's generative AI offering and can be used to create a platform that interacts with all parts of a business. This allows users to automate workflows, understand supply chains, or create something like an optimized nurse staffing schedule.
The possibilities with Palantir's AI platform are endless, which excites investors. But despite the buzz around the company, its financials aren't doing what you might expect.
Palantir's stock isn't cheap, but it's getting cheaper by the day
Because of how fast another popular AI investment -- Nvidia -- has been growing, investors might be tricked into thinking that Palantir is more than doubling its revenue year over year. Instead, it grew its revenue by 17% year over year in the third quarter to $558 million. Management also gave guidance for 18% growth in the fourth quarter.
While this is healthy growth, it's far from the range many investors might expect. Despite that, Palantir's stock trades for a hefty price-to-sales (P/S) premium.
PLTR PS ratio data by YCharts.
With Palantir entering the year priced around 7 times sales and reaching heights of 22 times sales in November, the amount investors have been willing to pay for the shares has drastically increased.
But every stock has its limits, and Palantir found it in November, which is part of the reason the stock has sunk over the last few months of 2023 and during a few days in 2024.
The company needed to grow faster to justify its valuation, and with no new information, investors decided to take gains and wait. So, is this weakness a great buying opportunity?
Palantir's platform is great, and its fairly even split between government and commercial contracts spreads the risk of what happens if a recession occurs. Furthermore, profitability is steadily rising and should make even more progress throughout 2024.
PLTR profit margin (quarterly) data by YCharts.
While it's highly unlikely that the stock will rise 160% again in 2024, it could happen if Palantir's sales increase by a similar amount (which is unlikely). It has a premium price tag and needs to grow into that valuation or risk future sell-offs.
Due to its valuation, I wouldn't have taken a position in Palantir a few months ago, but I'm more intrigued at this price point. Investors are OK with taking a smaller position now, as the price might be expensive, but it's at least reasonable.
With Palantir's stock down to more reasonable levels, I'm confident in saying that the stock can once again beat the market over a three- to five-year holding period.
